EU finance ministers discuss plans for new taxation of digital firms

Posted On: October 10, 2017

European Union plans for a new taxation system for digital companies, such as Skype and Amazon, both of which have European headquarters in Luxembourg, were discussed on Tuesday by EU finance ministers.

A report from the European Commission in September said the effective average tax rate for a traditional international business in the 28-member EU is 23.2% compared with 8.5% for a firm working to a digital domestic model.

“We can’t rely on tax regulations that predated the digital era,” European Commission Vice-President Valdis Dombrovskis told a news conference. “We must see how far we can move before December.”

He was speaking after a meeting of the Economic and Financial Affairs Council — known as Ecofin — that brings together finance and economy ministers from EU nations. Some European Commissioners also participate. It took place in Luxembourg.

Early next year the Organisation for Economic Cooperation and Development will present an interim report to the G20 on the taxation of the digital economy. In its report the Commission called that “an important milestone.”

Dombrovskis said an international solution is preferable and the most effective. Failing that, the European Union is ready to push ahead itself, he said.

Earlier in the day Estonian Finance Minister Toomas Tõniste told reporters via a translator that the aim is to have “conclusions” before the end of his country’s six-month presidency of the Council of the European Union which runs until the end of December.

In its report, the Commission set out its objectives in forming new tax rules; fairness, competitiveness, integrity of the single market and sustainability. It offered different solutions.

One is to embed taxation of the digital economy in the general international corporate tax system. This would require “fundamental reform” to address specific challenges, such as digital companies that are able to have a significant market presence without a substantial physical presence.

The Commission has announced that its preferred option, at the EU level, is the Common Consolidated Corporate Tax Base (CCCTB) proposal. This revises rules about where a company is permanently established and uses the firm’s assets, labour and sales to calculate where its value is created, and the firm can be taxed accordingly.

“The Commission said they would like to put this in the context of CCCTB, I have no objection in principle to this,” Luxembourg Finance Minister Pierre Gramegna told journalists.

“We need to see what the concrete proposal of the Commission is and that’s a Pandora’s box we don’t know yet,” he said. “We want that whatever will come eventually on the CCCTB, will be something that the OECD can live with.”

Because finding “a meaningful solution to capture and allocate the value created in the digital economy” may take a long time, the Commission also suggested three short-term measures to protect direct and indirect tax bases in the different EU countries.

It proposed an equalisation tax on the turnover of digital companies, a withholding tax on digital transactions and a levy on revenues generated from the provision of digital services or advertising activity.

“All short-term options have pros and cons, and further work is needed on the detailed approach to find a workable solution for the single market and the global economy as a whole,” the Commission said in its report.

It cited questions about how a new tax regime will fit with double-taxation treaties, state aid rules, fundamental freedoms and international commitments under free trade agreements and World Trade Organisation rules.

All “would need to be examined. Yet something has to be done,” it said.